Reward Management

CHAPTER 4
GRADE & PAY STRUCTURE

Learning Objectives
To define grade and pay structures;
Discuss the main characteristics of a pay

structure;

Grade Structure & Pay Structure

A grade structure consists of a sequence or

hierarchy of grades, bands or levels into which jobs

that are broadly comparable in size are placed.
Grades may be defined by a bracket of job
evaluation points or may be defined by a standard
grade definition.
A grade structure becomes a pay structure when
pay ranges, brackets or scales are attached to each
grade, band or level

Graded Pay Structures

Pay structures are defined by:
number of grades;
pay ranges;
Reference point;
Differentials;
Overlap;
Progression.

Narrow-Graded Structure
Number of grades: 10 or more in a narrow-

graded structure, whereas, less than 10 in a

broad-graded structure.
Pay Ranges: A pay range is attached to each
grade which allows scope for progression.
Four characteristics of pay ranges are:
1) span, 2) reference point or target rates, 3)
differential, and 4) overlap.

Four characteristics of Pay

Ranges
Span:
Span refers to the percentage by which the highest point

exceeds the lowest point.

This is usually b/w 20% to 50%. E.g., a span of 40%
would be $19,200 to $28,800.
First we will determine the mid-point, which is center of
the range. In this case it is 24,000.
Alternatively, ranges can be a percentage of the mid-point,
e.g., 80% to 120%.

Continued
Reference Point:
A reference point or a target rate is expressed in

terms of the rate for a fully competent person who

is qualified to carry out the job.
This is sometimes called the policy rate because it
is usually aligned to the market rate in accordance
with the companys policy.
It is the mid-point of a range as the range will be
developed around the mid-point (50th percentile).
We can also use 75th percentile or 25th percentile,
as midpoint, depending upon company policy.

Continued
Differential: refers to the percentage by

which the mid-point of a range is higher

than the mid-point of a range below.
Typically they are b/w 15% to 20%, but can
be as high as 25%.
Too low and too high a differential can be
problematic.

Continued
Overlap: There is usually an overlap

between grades, which enables recognition

to be given the fact that a highly
experienced person at the top of the range
may be contributing more than a person
who is still on the learning curve portion of
the next higher grade.

Overlap between Grades/Ranges

Managing Pay Progression

Pay progression can be managed in a number of

ways. These methods collectively come under the

rubric of contingent pay.
Some important contingent pay schemes include:
Performance-related pay (PRP)
Competency-related pay
Contribution-related pay
Skill-related pay
Service-related pay

Performance-Related Pay (PRP)

In such schemes pay increases are linked to

achievements of results, known as targets or

outcomes.
Consolidated increments are provided within a
range, level, or zone in a graded, family, and
broadbanding structure, respectively.
Agreed outcomes/targetsperformance measures actual

performancerating formula performance pay

A basic model for PRP is given, which uses the

formula provided in PRP matrix.

Pay Matrix According to

Performance and Position

PRP continued
A formula in the form of a pay matrix is used to decide on

the size of pay increments.

This indicates the pay increments to which individuals may
be eligible by combining the performance rating with
position on the scale/range. This is also referred to as
individual compa-ratio.
Increments decelerate along the range.
Alternatively or additionally high levels of performance or
special achievements may be rewarded by cash bonuses that
are non-consolidated.
Usually such cash bonuses are given when individuals have
reached the top of a range or when they reach the mid-point.

Competency-Related Pay
What is Competency?
Competency is an underlying characteristic of an

individual which is causally related to superior or effective

performance.
Competency is defined as a cluster of knowledge, skills,
abilities, attitudes, and behaviour that are related to
effective performance. It predicts who does something well
or poorly as measured on a certain criterion, i.e., volume of
sales for a sales person.
Competency refers to the ability of an individual to
perform rather than what they have achieved.

Five Pillars of Competency

1. Motive is the drive towards certain goals. Achievment

motivated persons will consistently set challenging goals, take

personal responsibility, and use feedback to do better.
2. Traits are personal characteristics that produce consistent
responses to situations or information. People will act above
and beyond call of duty to solve problems under stress.
3. Self concept is a persons attitude, self image , and values.
4. Knowledge refers to know how about work. Which facts
exists that are relevant to a specific problem and how to find
them.
5. Skill refers to the ability to perform a certain activity.

Exhibition of Competencies

HR Competency Model-HR as a
Strategic Partner

HR Competency Model-HR
Leader

Levels of Competencies

Implication of Competency
It refers to the individuals capacity to meet present

and future roles.

Individuals receive consolidated increases to their
base pay by reference of their competency they
demonstrate while carrying out their roles.
Competency-based pay can be used for managerial
and technical/professional people, where work
activities performed and the results to be achieved
are difficult to be measured precisely.

Core Competency Model

Contribution-Related Pay
Contribution-related-pay can be defined as a process for

making pay decisions that are based on assessments of both

the outcomes of the work undertaken by individuals and the
levels of competence and competency that have influenced
these outcomes.
It focuses on what people in the organization contribute
towards the organizational goals using their skills and
efforts.
Contribution-related pay rewards people for both their
performance (outcomes) and their competence (inputs).
Usually pay increments are consolidated, but in some cases
cash bonuses are also provided.

Contribution-Related Model

Approaches of ContributionRelated Pay

Some of the approaches used in CRP include the

following:
Matrix formula
Consolidated increments linked to competence up
to reference point,
Mix of consolidated increases and bonuses, and
Threshold Payments

Matrix Formula

Consolidated increments linked to

competence up to reference point
Increments are provided to individuals as

long as the competence levels are judged to

be progressing satisfactorily.
Above the reference points bonuses can be
earned for exceptional achievements.
Sometimes these bonuses are consolidated
if higher levels of performances are
sustained.

Contribution-Related Pay Model

Mix of consolidated increases

and bonuses
In this type of arrangement individuals can earn a mix of

base pay increments and bonuses which varies according

to a persons position on the pay range.
The higher up an individual in the range is the greater will
be the amount of bonus. So those who are higher up in the
range will receive an 8% bonus and 2% increase in the
base pay, while outstanding individuals lower in the range
will receive a 2% bonus and 8% increase in the base pay.

Threshold Payments
Thresholds are built into the pay ranges.
Individuals must cross the threshold in to a higher

part of the range by meeting some contribution

criteria.
Such systems are found in pay spine structures.
The thresholds can also be used in a broadbanding
pay structure, where the first threshold can be
fixed at the fully qualified zone, and the second
threshold can be fixed at expert zone.

Skill-Based Pay
It is directly linked with the skill-acquisition of an

employee.
It focuses on what skills the business values and
what can the individual do to demonstrate these
skills.
Rewards are linked to the employees ability to
apply a wider range of skills or higher level of
skills to different jobs or tasks.

Three Types of Criteria

There are three types of criteria that can be used to anchor

the skill-based pay plan, such as horizontal, vertical, and

depth.
One or all three can be used in a skill-based plan design.
The first two, horizontal and depth skills are technical in
nature.
The third, vertical, refers to organizational skills which are
performed by management in traditional organizations.
These are also known as three dimensions of skillshorizontal, vertical, and depth.

Example of Types of Skills

Horizontal skills refer to similar skills. For example clerical staff of a

retail store might be trained to perform several types of record keeping

tasks. They may perform employee attendance record, schedule sales
people work shifts and monitor the use of office supplies. Although
focused on the different operations of store-operation, yet all are based
on the basic knowledge of record-keeping.
Vertical skills are those skills that are traditionally considered
supervisory, such as coordinating, training, and leading others.
Skill depth refers to specialized skills. Specialized skills development
differs from both vertical and horizontal types in that the employee
training leads to a highly developed specialty, such as a high-level
engineer might have within a specific technology.

Skill Measurement
Skill certifications are methods to indicate when an

employee has met the established criteria for skill

performance.
It is vitally important that these skill certifications should
be clear, objective, and attainable.
There are many ways to approach measurement, such as:
Skill certification can be achieved through work samples,
paper and pencil tests, oral tests, professional designations,
or a combination of the above.
Using some form of work sample is the best indicator of
successful skill acquisition.

Examples of Skill Certification

In one skill-based plan for claim service representatives,

the quality of the claim file is assessed on specific criteria

linked to successful claim handling. In this design
individuals advanced their pay by demonstrating increased
proficiency in their technical claim skills.
In another plan for mechanics, skill certification is tied to
successful outcomes in repairing different types of
machinery.
In both of these plan designs, the work sample approach
links the skill certification to business related outcomes.

Training Consideration for SkillBased

Pay
The very nature of skill-based pay plans require a commitment
to providing training to so that employees can learn new skills,
and therefore, earn higher compensation.
It is desirable to place substantial responsibility to acquire new
skills on the employee.
The overall training plan for the organization should closely
link to the skill blocks.
This allows training professionals to focus on the precise skills
and knowledge required to meet the desired business
outcomes.
As processes change and new skills are needed, training plans

need to be modified to match the needs of the business .

Skill Block
A skill block is a group of skills or knowledge that the

organization is willing to base pay upon. The skills provide

a foundation for the skill-based pay design.
Consideration must also be given to the sequence in which
skills are obtained. It may be important for base horizontal
skills to be demonstrated by employees before they can
learn depth-related skills.

Linking Pay to Skill

Once skill blocks are designed, pay considerations must be

given to the movement through the skill blocks and levels.

Market data can often be used to determine the entry and
maximum compensation for a position.
Again it is important to consider the outcomes desired by the
business. It may be appropriate to provide greater
compensation change for certain skills or certain criteria
classes. In other cases equally divided increases may be
provided for each step in the skill block.
It might also be advantageous to consider lump-sum bonus
payments for certain skills. For instance those concerning
high performance teams, could be paid in lump sum to the
entire team instead of an increase to base pay.

Department of Transport Road MaintenanceSample Skill Blocks for Entry Level

Skill
code

Skill Block

Value ($)

1M1

Small hand and power tools

312
Introduction to erosion control devices
Introduction to work zone traffic control
Basic two-way radio communication
Operation of chain saw, hand power compactors, or hand
power auger.

1M2

Operate second piece of category A equipment, such as

air compressors, forklift, mixer, etc.

312

1M3

Operate third piece of category A equipment

312

1M4

Commercial drivers license

1M5

Operate medium dump truck (commercial drivers

license of 1M4 required)

416

Example 1: Beverage Plant

The SBP in the company had 25 steps.
Mastery of each step was worth a pay

supplement of approx. 15 cents per hour.

Everyone in the plant was eligible to reach
the maximum level.

Example 2: Frozen Dough

Factory
New employees in the plant had one year to

master 3 skill blocks or their employment

was terminated.
After the first year employees could choose
among an additional seven skill blocks to
master if they wished to do so.
An employee who had mastered al the
seven blocks could double their base rate.

Example 3: Best Foods

The plan was applicable to all non-exempt

employees.
Skills were bundled into skill blocks.
Employees could learn up to 9 skill blocks.
Employees could learn on average of 6 skill
blocks over a period of 12 years.
The more skills they learned the higher would
be their base pay.

Example 4:General Foods

The plant had four different rates for all operators.
Starting rate-paid upon hiring
Single job rate-paid when the new hire mastered the initial job

assignment.
Team rate-paid when the employee mastered all jobs within his
team.
Plant rate-when the employee mastered all jobs in the entire
plant.
Besides these four rates the plant also had an add-on rate, in case
if an employee mastered certain specialised jobs, such as
electrical maintenance.

Continued
There was no limit on how many employee

could qualify for a given rate.

There was also no timeframe during which
an employee could advance from one pay
rate to another.
Supervisors were given the responsibility for
making decisions about pay rate increases in
consultation with team members.

Example 5:General Mills

The plant had four production areas, such as receiving,

mixing, filling, and packing.

The steps in the production processes were interdependent.
Each production area was a skill block.
In each skill block there were three skill level-totaling to
12 skill levels.
Employees had to advance to at least skill level two in
their block to continue employment.
Employees received $0.25per hour increase for each skill
level and their was a spread of 50% between the bottom
and top skill based pay rate.

Difference between Competency-based and

Skill-Based pay structures
SBP links pay to the depth and breadth of skills, knowledge, and abilities

a person acquires that are relevant to work. SBP pays an individual for
all the skills for which they have been certified, regardless of the work
they are doing, require all or a few of those particular skills.
Competency is demonstrable characteristics of a person, including skills,
knowledge, and behaviours that enable performance. A competency
framework defines the behaviour needed by an employee to achieve
effective job performance.
SBP is normally associated with manual duties and the pay increases
with skill acquisition, weather currently needed or not, thus adding to the
pay-roll costs.
CBP is based on subjective assessments and not tests and salaries are
adjusted annually on ability to performan not automatically.

Continued
SBP compensates people for the skills they bring to the

job, for example range of knowledge, number of businessrelated skills mastered, and the levels of those skills and
knowledge, or some combination of level and range.
competency is a trait or characteristic that a job holder
needs to perform the job well. An employer would
examine the most successful employees and learn what
those people do well. Once the elements have been
identified these will be than categorized as competencies,
and all employees would be paid on the basis of how ell
they demonstrate those competencies.